A Tariff Lands on Imports
A per-unit tariff lifts the price inside the country to the world price plus the tariff, so imports shrink, the government collects revenue, and two deadweight loss triangles open.
A Tariff Lands on Imports
International TradeA per-unit tariff lifts the price inside the country to the world price plus the tariff, so imports shrink, the government collects revenue, and two deadweight loss triangles open.
Equilibrium at Quantity 64, Price ($) 49
Free trade baseline
Before the tariff the country buys at the world price Pw. At Pw, domestic quantity supplied is read off the supply curve, domestic quantity demanded is read off the demand curve, and imports are the horizontal gap between them. Domestic buyers pay that low world price, so consumer surplus is the whole area between the demand curve and the Pw line.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
A Tariff Lands on Imports, step by step
- 1
Free trade baseline
Before the tariff the country buys at the world price Pw. At Pw, domestic quantity supplied is read off the supply curve, domestic quantity demanded is read off the demand curve, and imports are the horizontal gap between them. Domestic buyers pay that low world price, so consumer surplus is the whole area between the demand curve and the Pw line.
- 2
The tariff is imposed
The government charges a fixed amount on every imported unit. Importers still pay foreign sellers the world price, but they now owe the tariff on top of it at the border, so no unit can reach a domestic buyer for less than Pw plus the tariff. The price inside the country rises to Pw plus the tariff, while the world price foreign sellers receive is unchanged. Neither domestic curve shifts. What the tariff moves is the price line the country actually faces.
- 3
Imports shrink from both ends
At the higher effective price domestic producers move up along their supply curve and produce more, while domestic buyers move up along their demand curve and consume less. Imports are still the gap between those two quantities, but the gap is squeezed from both sides at once, so imports fall well below their free trade level.
- 4
The government collects revenue
Tariff revenue is the tariff per unit times the imports that still arrive: the rectangle between the world price line and the higher domestic price line, stretching across the remaining import quantity. Nothing is collected on domestic output, which is why a tariff large enough to wipe out imports entirely would raise no revenue at all.
- 5
Two deadweight loss triangles
The left triangle is production inefficiency: units the tariff handed to domestic producers use up more resources than simply buying them at the world price. The right triangle is consumption inefficiency: units buyers valued above the world price are no longer bought. Consumer surplus falls by more than the producer surplus gain and the tariff revenue combined, and those two triangles are exactly the difference.
Where it ends up
A tariff raises the price inside the country to Pw plus the tariff, expands domestic production, cuts domestic consumption and imports, transfers surplus from consumers to producers and to the government, and leaves two deadweight loss triangles.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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